Kamakura Corporation has consulted with major financial institutions around the world on transfer pricing and pushing forward the state of the art. Kamakura's transfer pricing clients range in size from $6 billion in assets to $500 billion in assets. The transfer pricing field is changing rapidly and the most exciting developments include credit-adjusted transfer pricing, internal credit derivatives and option-adjusted transfer pricing.

Kamakura's transfer pricing solution is the first transfer pricing module in the industry to offer full option-adjusted transfer pricing, with arbitrary degrees of consumer "rationality," all performed on a multi-currency basis.

Kamakura's transfer pricing solution allows for multiple transfer pricing centers and for a separate "ALCO book" and "irrationality book" for that part of the organization which assumes the risk of consumer option exercise.

Kamakura Transfer Pricing

Kamakura Corporation has consulted with major financial institutions around the world on transfer pricing and pushing forward the state of the art. Kamakura's transfer pricing clients range in size from $6 billion in assets to $500 billion in assets. The transfer pricing field is changing rapidly and the most exciting developments include the following topics: Credit-adjusted transfer pricing, internal credit derivatives and option-adjusted transfer pricing.

Kamakura Risk Manager's (KRM) transfer pricing analytics allow for a credit risk book that is fully consistent with Kamakura's KRIS corporate and sovereign default probabilities and the credit adjusted valuations of KRM.  KRM's transfer pricing calculations, first released in 2001, take advantage of the same features that all Kamakura risk analytics share:

• Same graphic user interface
• Same ODBC data base design 
• Same financial analytics 
• Same multi-currency term-structure model-based approach 
• Same credit default modeling and valuation approach

KRM's design is rooted in the 25 year involvement of senior management at Kamakura in transfer pricing issues, beginning with Dr. Donald van Deventer's introduction to the subject at Bank of America in 1974 while working for Mack Terry, the father of the transfer pricing discipline in banking.

Dr. van Deventer and Dr. Dennis Uyemura also wrote about the conceptual aspects of the transfer pricing discipline in their popular book, Financial Risk Management in Banking.  Because KRM is a single, integrated system, one can run the following analytics on a fully consistent basis:

• Traditional transfer prices without consideration of optionality
• Credit-adjusted transfer prices reflecting true borrower credit spread
• Option-adjusted transfer prices with fully rational consumer behavior
• Option-adjusted transfer prices with partially rational consumer behavior
• Net income simulation for each transfer pricing book
• Full mark-to-market of the transfer pricing books
• Multi-currency option-adjusted value at risk
• Multi-currency option-adjusted stress-testing
• Full credit adjusted valuation
• Default probability estimation and simulation
• Transfer pricing and valuation of non-maturity assets and liabilities

KRM produces many standard reports that can be exported to Excel or web pages using the Crystal Reports reporting tool:

• Business unit net income, both matched maturity basis and regular
• Business unit mark to market "equity", both matched maturity and regular
• Business unit value at risk, both matched maturity and regular
• Transfer pricing unit net income, both matched maturity basis and regular
• Transfer pricing unit mark to market "equity", both matched maturity and regular
• Transfer pricing unit value at risk, both matched maturity and regular
• Total bank net income, both matched maturity basis and regular
• Total bank mark to market "equity", both matched maturity and regular
• Total bank value at risk, both matched maturity and regular
• Credit-spread based
• Net income
• Mark-to-market valuation
• Value at risk
• For each business unit, the transfer pricing unit, the credit unit, and the total bank
• Drill-down display of credit spread and transfer price for every asset and liability
• Summary credit spread and transfer price for each business unit and product